Managing Your Company’s Housefile

The “house file” is the most valuable asset of any mail-order catalog company. It is a file containing the names of all previous mail-order buyers—that is, people who have actually made a purchase from your catalog. In maintaining your database, it is important to separate previous buyers from general inquiries, as each group requires a very different mailing strategy. It is also necessary to make a clear distinction between a buyer and a customer. I prefer to think of a buyer as a person who has made only one purchase and a customer as a person who has made repeat purchases. Obviously, customers must first start out as buyers! However, since profits are only made after a buyer has made at least two purchases, your company’s focus should clearly be on converting buyers into customers. Let’s discuss how to manage and get the most out of your house file.

The Importance of RFM

Not all names on your house file are equal. Therefore, you should manage your file based on the relative importance, or value, of your customers. Today, there are several successful house file modeling techniques and programs, but in my opinion, recency, frequency and monetary value (RFM) segmentation is still the most effective circulation management tool. The RFM classification system “flags” each customer with a three-place identifier that is based on the recency, frequency and total monetary value of former purchases. The data is based on customer information within a current master file. (Inactive customers’ names will normally be purged after three to five years of no activity depending on the cataloger, of course.) Recency is the most important determinant of future purchases.

A three-dimensional designator is useful for locating each customer within a “cell” relative to other customers. The three-dimensional cube shown above is divided into levels along the recency, frequency and monetary axes. Thus, each customer’s name resides within a given cell according to similar characteristics.

Catalog mailing schedules will be based on RFM cells and not specific individuals. With each update to the house file, an analysis is performed on the number of customers and dollars associated with each cell. This information enables the cataloger to identify which cells contribute the most to profit and overhead, and determine a catalog mailing schedule accordingly. In order to maximize revenues per catalog, only customers within designated cells will receive a catalog at each mailing. Others will receive a catalog according to a frequency that is based on predetermined criteria.

RFM analysis can help your company minimize the waste of direct selling dollars by identifying unprofitable mailings to less frequent and inactive customers, thus enabling you to (1) maximize profits and (2) invest the money saved in growth-oriented programs, such as new-buyer-acquisition programs.

Converting Buyers into Customers

The goal of catalogers is to turn those one-time buyers into customers. Since a sizable investment is made in acquiring buyers, it is imperative that you develop programs that encourage repeat buying. Simply mailing catalogs indiscriminately and without a strategy in place is ineffective and costly. Establishing concentrated programs that encourage repeat purchases is the key to a successful business. Here are a few ways to turn one-time buyers into customers:

1. Bounce-back catalogs. Always, without exception, include a catalog with each outgoing order. Bounce-back catalogs should be packed on top of the order so that they are the first thing customers see when they open their package. By doing this, you reach “hotline buyers”—that is, buyers who have recently purchased—the moment they receive their order. Even though they have just made a purchase, they are likely to buy again. As mentioned, recency of purchase is the most important criterion in the RFM model. Moreover, it is likely that the buyer will give the catalog to a neighbor or a friend. From a cost standpoint, bounce-back catalogs are efficient because they require no additional postage. The table on page 97 shows the actual, unadjusted results of a few consumer catalog companies that use this method, as compared to the results received from stand-alone house-file mailings and prospect lists.

Bounce-back catalogs in company A performed much better than the original mailings. Bounce-backs from company B and company C also showed better financial results than those from the house file and from prospects.

2. Increased mailings to hotline buyers. No matter how many times you mail to customers in your house file, you can generally mail more frequently to your hotline buyers. Many hotline buyers are recent additions to your house file. Mailing to them right away and more frequently than your regular house file customers can pay big dividends.

3. Special offers to first-time buyers. The key here is to make your first-time buyers feel welcome and special! In building customer loyalty, let new buyers know that you are aware that they are new customers. Make them feel important! Offer them a discount or a free gift as a form of recognition and as an attractive incentive to continue to do business with your company. For example, you can pack a “Welcome New Customer!” coupon and/or gift in the outgoing package to new buyers.

4. Special thank-you note to first-time buyers. Let your new customers know that you appreciate their business! You can do this in one of two ways: either by a separate first-class thank-you note mailed directly to the buyer, or by including a note with an outgoing package. In the latter case, you can either put the note in the package (probably the most effective way) or have the computer print a special thank-you on the packing slip.

Starbucks Coffee, for example, welcomes new members to their Encore automatic shipment club by offering a free gift card and gift to new customers. The opening panel on the note card packed with the order reads, “Thank you for choosing Starbucks Encore.” Inside, the note states, “Enjoy the taste of Nicaraguan Coffee—our free gift to you.”

5. Special letter and coupon to first-time buyers. Send your new buyers a special letter, signed by the president of your company and on company letterhead, immediately after they receive their initial orders. This letter should thank them for their order and offer an incentive to buy again.

A well-maintained and current house file is key to a successful mail order catalog company, and an RFM circulation analysis can be extremely effective in determining how to maximize profits and minimize direct-selling expenses. Because mail-order companies rely so heavily on their house file, it is imperative to maximize the purchasing activity of customers already in your house file and to convert first-time buyers into established customers. To this end, you should incorporate programs that will offer incentives to new buyers to continue to do business with you, and provide financial incentives that will encou-rage the loyalty of ongoing customers. A heal-thy, active, satisfied customer database will go a long way toward maximizing customer relations and company profit.

Stephen R. Lett started Lett Direct Inc. in 1995 after spending the first 25 years of his career with leading catalog companies. Lett is on the faculty of Indiana University where he teaches direct marketing at the MBA level, and he has served as chairman of both the Catalog Council and B-to-B Council of The DMA. Lett can be reached at (317) 844-8228.

Generating more sales from your house file should be an ongoing goal. I’ve always said that it is the house file that pays the light bill! Whatever you can do to encourage repeat purchases is to your advantage. Here are several ideas for your consideration:

• Encourage quantity pricing/purchases, e.g., “Save 10% . . . 2 for only $39!”

• Encourage customers to increase their average order size by offering a discount when they purchase three or more line items.

• Offer a graduated discount based on the amount spent. For example, save $5 on a $50 purchase, $10 on a $75 purchase, and $15 on a $100 purchase. (This kind of offer is frequently made by Victoria’s Secret).

• Include ink-jet special messages on the back of the catalog that refer to “new” items added to the catalog.

• Offer a free gift with an order.

• Offer discounts or free shipping with an order (be sure to state a minimum).

• Test a get-a-friend offer.

• Offer an incentive for placing orders on the Web.

• Develop an add-on offer for phone orders. For example: “When you place your order by phone, please ask about our Special of the Month.”

• Include bounce-back catalogs with every order, and ink-jet a “special offer” message on the catalogs.

• Offer a deferred payment plan if an order is over a certain dollar amount. For example, with orders of $200 or more, provide the option of charging the customer’s credit card in three equal installments.

The most important factor in all of the programs mentioned above is to give new buyers special recognition and to do this promptly after their initial transaction. Timing is key! Buyers should feel like their business matters and is appreciated by your company.